Economic Analyses

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Monday, June 13, 2016

Over the past years, federal government transfers to households as a
share of taxes it raises on income has fallen. This, in part, is due to the
fall in unemployment. Compared to the earlier 1980s or the mid-1990s, a higher
proportion of the labor force is earning income, paying taxes, and consequently
receiving less transfers from the federal government [here]. But at the same time,
income inequality is rising.

Federal
Government Current Transfer to Households and Income Tax, Gross domestic
product (GDP), Canada, 1981:Q1-2015:Q4

Ways of reducing income inequality is to ease the fiscal burden on the
middle class and increase transfers to low-income households. That is what the
government of Justin Trudeau has done in its 2016 budget.

Among other things, the federal government

reduced the second personal
income tax rate from 22 to 20.5 percent,

Improved
the child benefits and employment insurance programs

These budget measures have impacts on growth. Everything else held
constant,

cutting income tax by one
percentage point boosts growth by .05 percentage point and

increasing transfers to
households by one percentage point raises growth by .37 percentage
point.

The impact on growth of raising transfers is greater than that of
cutting income tax because a larger number of households benefits from it
whether they have a paid job or not.

Thanks to these budget measures, growth in Canada could be, this year,
higher than expected. But my big worry is the CA$ 29.4 billion deficit
occasioned without any plan of returning to a balanced budget in the near
future.

Friday, April 1, 2016

The collapse in the price of oil has caused an economic
downturn in many provinces in Canada especially in the Prairies (Manitoba,
Saskatchewan, and Alberta). Many businesses in the oil and related industries
closed, people lost their jobs, and unemployment has risen.

The Prairie provinces used to have the lowest
unemployment rates in Canada but this year unemployment rate in Alberta has
gone above the national average. This has not been observed since December
1988.

Unemployment Rates, Canada and the Provinces of the Prairies, 1981:M1-2016:M2

Unemployment in Alberta rose, in
January this year, by 60.9% compared to January last year. In February, the
year-to-year growth rate was 46.3%.

Saskatchewan also experienced
extremely high year-to-year growth in unemployment in the second half of last
year. In July, last year, unemployment year-to-growth rate was 62.5%.

But unemployment rate in
Saskatchewan and Manitoba are still below the national average. A reason for
that is in the importance of the oil and gas extraction industry in these
economies. The average share of this industry is respectively 1.2%, 17.7%, and
27.8% in the economies of Manitoba, Saskatchewan, and Alberta.

A way of reducing the
vulnerability of the economy of Alberta is diversification.